Central bank president: Business models based on cheap labor will disappear
According to President of the Bank of Estonia Ardo Hansson, the share of labor-based businesses in the Estonian economy has increased in recent years, while that of production-based businesses has decreased. This means that salaries will keep growing, and that business models based on cheap labor will disappear.
Slow economic growth brought along structural change, Hansson said. The number of businesses depending on the skills and talent of its employees had been on the increase, while models based on the availability of cheap labor mainly focused on production had been weakened.
At the same time, Estonia’s working population was shrinking, which increased the pressure on companies to pay competitive salaries, Hansson’s analysis demonstrated. The current salary growth would continue in the foreseeable future, Hansson pointed out.
“In such an environment, business models based on cheap labor are increasingly forced out of the market. We can see already now that the lower the salaries of a particular sector, the more difficult it is to find workers,” Hansson said at business paper Äripäev’s Äriplaan 2017 (Business Plan 2017) conference earlier this week.
Hansson added that at the same time the possibility couldn’t be excluded that companies might have been too optimistic about their future, and raised salaries too much, which could eventually lead to a backlash and pay cuts.
Due to the increase in expenses on labor, the competitiveness of Estonian export-dependent businesses had worsened over the past years, though there had been reason for optimism this year, with numbers improving slightly, Hansson said. Investment activity of companies had improved in the first half of 2016 as well, and there was reason to hope that this might revive economic growth.
“But economic growth can’t be guaranteed by investment alone. A lot of countries have achieved Estonia’s growth rate with fewer investments. There is still room for improvement making investment more effective,” Hanson pointed out.
He stressed that Estonia’s economic growth depended more than anything else on local companies’ competitiveness on the international market. For this reason, increasing exports needed to be made a priority.